A brief overview of the 2017 insurance regulatory trends

This publication is part of the Deloitte Center for Regulatory Strategy Americas' annual, cross-industry series on the year's top regulatory trends. The issues below provide a starting point for an important dialogue about future regulatory challenges and opportunities.

Multiple regulatory influences

Multiple regulatory influences at the state, federal, and international levels continue to present significant challenges for the industry—particularly for insurers designated as systemically important financial institutions (SIFIs), as well as those that own a depository institution. However, over the past year there have been some important developments that are helping to reduce regulatory confusion and uncertainty.

One of the biggest developments was a long-awaited speech by Governor Daniel Tarullo of the Federal Reserve Board (FRB). In his speech, Tarullo indicated that the FRB’s approach for determining the additional capital requirements for insurers with depositories would largely be consistent with the approach already in use by state regulators. This was welcome news for many insurers that were worried the FRB might adopt its own methodology, making the compliance challenge even more complex and burdensome.

Own Risk Solvency Assessment (ORSA)

Companies subject to ORSA filings are required to submit an annual filing to their state department of insurance detailing the company’s own assessment of its risk profile, the processes in place to manage risks, the potential impact of those risks, and a view on solvency.

Companies that have been successful with ORSA implementation have taken the time to understand its components, used it as an opportunity to enhance their own risk and capital frameworks, and sought to drive business value from the ORSA process. The key challenges are:

Department of Labor (DOL) fiduciary standards

The DOL’s “Conflict of Interest” rule (the Rule) has been final and effective since June 2016. Based on the results of the 2016 presidential and congressional elections, there’s considerable conjecture whether the current Rule will remain viable, and if the April 10, 2017, applicability date will be delayed. Although there may be avenues for the new presidential administration and incoming 115th Congress to delay, repeal, or substantially change the Rule, each of these avenues may face significant challenges. Potential modifications could result in the delayed applicability date and increased emphasis on client disclosures.

At the moment, due to the many unknowns to confidently assess the likelihood of the action being taken with respect to the Rule, we’re observing our clients continuing their robust efforts to prepare for the Rule. While some have begun to conduct scenario planning efforts should the Rule be delayed, repealed, or amended in some manner, most firms have made clear choices on changes to their business models, product shelf decisions, compensation choices, exemption strategy, and plans to proceed with implementation.

Cyber technology

Cyber technology is a major issue that regulators are grappling with as they seek to adapt insurance regulation to the tools and innovations available both to the industry and regulators.

The existence of multiple regulatory structures for cybersecurity could raise a number of issues, including potential duplication and added costs. However, in the event of cyber breaches, insurance companies might find it’s more challenging to defend themselves in court without the “safe harbor” provided by standards, leading practices, and a codified structure—all of which reduce the potential for variable and uncertain interpretations by different jurisdictions and juries.

Similar concerns surround the sale of cyber insurance. Although the market need is clearly recognized as an opportunity, defining and measuring risk is a major concern.

Acquisitions from abroad

In terms of deal value, 2015 was the most active year for insurance mergers and acquisitions (M&A) in history—and a significant portion of those were done by foreign acquirers. In fact, the awakening of foreign acquisitions was potentially the story of 2015. However, in 2016 there was a slowdown in acquisitions from abroad, seemingly fueled by regulatory concerns.

Foreign companies are looking to export capital and diversify away from their home markets by acquiring US-based insurance companies. The US insurance market is the largest in the world. While it’s growing slowly on a percentage basis, on a dollar basis it’s growing as fast as any market in the world. This makes the US a very attractive option, especially for insurers in China and Japan. However, regulatory approval is a requirement for all deals, and regulatory issues seem to be a key factor in the recent slowdown for in-bound deals from abroad.

Corporate governance

According to the National Association of Insurance Commissioners (NAIC), “Corporate governance defines all organizational roles, responsibilities, and accountabilities at all levels. It describes and explains the management hierarchy, that is, the decision-making and accountability chain and ultimately who has the power to manage and legally represent the company in all settings. Corporate governance spells out requirements for documenting decisions and actions as well as the thinking behind them. It also provides for corrective action for non-compliance or weak oversight, controls, and management.”

The NAIC adopted enhanced corporate governance model laws and regulations that states began to enact in 2016. For insurers, this new oversight imposes a greatly increased level of regulatory scrutiny, both on corporate actions and potential actors—including board members and executives.

Compensation, qualifications, and risk oversight structure are but a few of the many areas to be examined under this enhanced corporate governance regime. And since there are no exceptions to the complex and far-reaching model, insurers—especially smaller ones—will likely need to seek an external evaluation of their current corporate governance model before reporting to their state of domicile.

Principle-based reserving (PBR)

PBR for life insurance companies is a dynamic replacement for the current reserve requirement approach, which is based on a static formula. As a dynamic approach, PBR is designed to more accurately reflect today’s more complex life insurance products—as well as the increasingly complicated environment in which insurers operate.

PBR may be the single most important change to life insurance reserving in many years. If enacted as designed, it will allow insurers to “right size” reserves, narrowing the gap between statutory and economic reserves and possibly freeing up capital for other uses. At the same time, it will require insurers to change their reserving standards. Therefore, it could affect the product mix insurers find most profitable. Many believe it could also require insurers to modify their skill set.

Regulatory response to digital technology

Digital innovations are creating new and unforeseen opportunities and challenges for insurers and regulators alike. For insurers, technology innovations are creating significant opportunities. For example, a growing number of companies are incorporating telematics technology into their automobile insurance offerings. Many insurers are also harnessing the power of new developments in financial technology (fintech) by purchasing or partnering with fintech companies, or by creating their own internal innovation units.

The biggest change—and challenge—for the insurance industry might be the pace of change itself. For example, home-sharing sites have grown at an exponential rate, dwarfing the growth rate of the traditional hotel and lodging industry. Similarly, blockchain is a rapidly emerging technology with the potential to streamline and transform many insurance interactions. This rapid emergence and convergence of new digital technologies disrupt the statusquo, both for insurers and the regulators that govern them.

Market conduct

The NAIC and various state insurance departments continue to devote considerable attention to the evolving set of market conduct challenges. A number of NAIC task forces and working groups have been focusing renewed attention on key areas revolving around consumer protection, particularly the need to protect seniors as the US population ages.

Insurance products receiving special attention include long-term care, Medicare supplements, contingent deferred annuities (CDAs), and creditor-placed insurance. Also, in 2016 the NAIC and various state insurance regulators worked to develop a formal regulatory accreditation/certification proposal for market conduct examinations. While the market regulation accreditation program will likely not go as far as the existing formal accreditation program for financial solvency regulation, it could still have a profound impact on both insurers and regulators. The proposal will likely be finalized in 2017 for consideration by the full NAIC membership.

Longevity risk charge

Longevity risk is the risk that a life insurer will lose money if actual survival rates and life expectancy surpass expectations and assumptions. The NAIC has created a Longevity Risk (A/E) Subgroup to provide recommendations for recognizing longevity risk in statutory risk-based capital (RBC) of US life insurance legal entities writing certain kinds of products.

A broad number of factors and trends are driving these changes, including:

Rising life expectancy due to improvements in medicine, safety, health care, etc.

Long-term care

Long-term care insurance reimburses policyholders for daily long-term services and support, such as home health care, nursing home care, and hospice. The US population is living longer, so demand for this type of product is growing exponentially. However, a variety of issues are prompting increased regulation and scrutiny in this area.

Many long-term care (LTC) products, written as far back as the 1960s, were inappropriately modeled and underpriced. However, rate increases are difficult for many policyholders to afford, making it difficult for states to grant the necessary increases.

NAIC is discussing significant innovations to increase the number of affordable asset protection product options available to meet growing demand in the US. Possible changes include everything from product modifications and state and federal incentives to the reduction in regulatory restrictions.

Potential changes to enterprise risk reporting

Enterprise risk reporting Form F is a filing where the ultimate controlling person/entity of an insurer subject to the filing identifies the material risks within the insurance holding company system that could pose enterprise risk to the US domestic insurer.

The NAIC is creating a guidance manual and/or best practice document to illustrate how to provide complete and thoughtful responses to the Form F items. The primary focus will be on non-insurance risks within the holding company system.

One concern for insurers is that the desired in-depth responses could identify weaknesses in a holding company system’s ERM framework—specifically, that it’s not comprehensive enough or doesn’t allocate enough resources to adequately assess the risks of non-regulated entities within the group.

Group regulatory capital initiatives

A number of group capital requirements are currently being developed and readied for implementation at both the domestic and international level. This is a new experience for the US insurance industry, which has never before had to contend with a group regulatory capital standard or calculation. Insurance groups determined by supervisors to be subject to the requirements will have to comply with the new group capital standard/calculation, in addition to any legal entity capital standards that may already apply.

Insurers should get up to speed on the various initiatives that are currently in progress and then analyze the implications for their businesses. They may also want to help shape the regulations by providing input and engaging with the organizations that are formulating the requirements.

Look again

In today’s rapidly evolving marketplace environment, key business issues are converging with impacts felt across multiple industry sectors. What are the key trends, challenges, and opportunities that may affect your business and influence your strategy? Look for more perspectives and insights from some of Deloitte’s forward thinkers.

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